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Analysis/Comment Last Updated: Feb 19, 2011 - 10:03 AM


Ireland, Eamon Gilmore and free lunch economics
By Michael Hennigan, Founder and editor of Finfacts
May 21, 2010 - 4:02 AM

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The Economist cover, June 16, 2005 edition.

British Prime Minister David Cameron has ushered in "a new age of austerity" and across the developed world free lunch economics is ending. While in Ireland, the Government struggles to reverse the excesses of the boom, political leaders, in particular Labour Party leader, Eamon Gilmore, fear telling the people that the easy spending of the past, is not just temporarily suspended, but unavoidably over for good. 

A "free lunch" was a common marketing incentive in American saloons in the nineteenth century and the late free-market economist, Milton Friedman, popularised the phrase - - there's no such thing as a free lunch - - by using it as the title of a 1975 book. The economic axiom was mainly ignored in the past two decades and Ireland wasn't alone in expanding public programmes and placating a legion of vested interests by spending money, temporarily available from asset and related credit booms.

New York Times columnist, Thomas Friedman, recently wrote: "We baby boomers in America and Western Europe were raised to believe there really was a Tooth Fairy, whose magic would allow conservatives to cut taxes without cutting services and liberals to expand services without raising taxes. The Tooth Fairy did it by printing money, by bogus accounting and by deluding us into thinking that by borrowing from China or Germany, or against our rising home values, or by creating exotic financial instruments to trade with each other, we were actually creating wealth." 

The US financed overspending by borrowing back dollars earned by China on its exports while we know too well that in Ireland public spending and employment growth depended on the property bubble. So while Bank of Ireland Private Banking's ranking of Ireland in its annual wealth reports, as the second wealthiest nation on earth, appeared to have had an air of fantasy to people who weren't in the grip of property hysteria, the position of Japan as the wealthiest country, contrasted with a more pertinent story on what can happen long-term when an advanced country goes from boom to bust.

In 1991, when prices peaked, the land under Tokyo's Imperial Palace was valued at more than all the land in the US state of Florida. According to The Wall Street Journal, the average price of a 750-square-foot condominium in Tokyo rose to more than ¥70m or about US$625,000 at current exchange rates in 1991 from about ¥25m in the early 1980s. After the crash, the average house price hovered around ¥40m, or about $360,000, for a decade and a half later. The subsequent Irish experience evokes the quip of the renowned baseball player, Yogi Berra: "It's déjà vu all over again."

America was obsessed about the fear of Japanese economic domination, which was stoked in 1992 by Michael Crichton's best-selling novel, Rising Sun. In the same year, President George H. Bush led a delegation from America's Big 3 carmakers pleading for greater access to the Japanese market. The President vomiting at an official dinner seemed to graphically illustrate the relative decline of the US.

However, by July 2007, when Bank of Ireland published its last wealth report, one week before the onset of the international credit crunch, while Japan was again on top, it was also an enfeebled giant where national prosperity was on the slide.

More than a third of Japan's work force were categorised as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compared with 23 per cent in 1997 and 18 per cent in 1987. These workers with few benefits in a high cost country earned less than the Irish minimum wage.

Car giant Toyota had also employed a large number of temps and gave an average monthly pay rise of just €6 in that year; the Bank of Japan reported that some 23 per cent of households had no savings in 2007, compared with just 10 per cent in 1996 and a Japanese Cabinet Office survey showed that despite a recovery in the economy, people felt a high level of anxiety about their daily lives - - the highest angst level recorded since the poll began nearly 40 years before.

Since the 1991 crash, Japan has spent huge amounts on infrastructure and its gross public debt is expected to exceed 200 per cent of its GDP (gross domestic product) this year. The country has an ageing population; it is not welcoming to migrant workers and its overall household savings rate has plunged to close to 2 per cent of disposable income. The Japan Times recently said that Japan's "lost decade" of the '90s proved that if people feel relatively comfortable they will ignore the fact that their economy is falling apart. It said even in Greece some Japanese people still don't see it. TV Asahi interviewed one Japanese expatriate living in Athens who seemed confused by the turmoil around her: "Does this mean I can't eat rice?"

June 2005 and Finfacts brought the news to those who hadn't bought into the Faustian Bargain that later wrecked countless lives: Global House Price Boom: The greatest BUBBLE in history.

For other rich countries which dominate the membership of the think-tank for governments, the Organisation for Economic Cooperation and Development (OECD), rising retirement and health costs are unsustainable.

The average legal age of retirement in member countries, is just over 64, but it dips to as low as 58 in Turkey, 60 in France and to as high as 67 in Norway and Iceland. Ages can vary between the sexes, with women often entitled to earlier retirement.

The labour force exit age - - i.e., the actual average age when people stop working - - is often higher or lower than the official retirement age. In Korea, the average man clocks in until he’s over 71 - - more than 11 years beyond retirement age; by contrast, his counterpart in Austria gives up the daily grind at about 59, or six years ahead of the official retirement age. In Ireland, the level is almost in line with the official retirement age of 66.

As regards, the number of years people spend in retirement on average in OECD countries, it’s just over 22½ years for women and about 17½ for men, who tend to work longer and die younger. For women, the longest retirements are in France, where retirement stretches on for about 27½ years; France also holds the OECD record for men  - - 24 years spent in retirement, compared with just over nine in Mexico.

The European Commission says that by 2050 the percentage of Europeans older than 65 will almost double. From 7 workers for every retiree in the 1950s, by 2050, the ratio in the EU will drop to 1.3 to 1.

The New York Times says gross public social expenditures in the European Union increased from 16% of GDP in 1980 to 21%, compared with 15.9% in the United States. In France, the figure now is 31%, the highest in Europe, with state pensions accounting for more than 44% of the total and health care, 30%.

France's state pension system is currently running a deficit of €11bn; by 2050 it could be €103bn.

The Times says many in Europe say the Continent will have to adapt to fiscal and demographic change, because social peace depends on it. “Europe won’t work without that,” said Joschka Fischer, the former German foreign minister, referring to the state’s protective role. “In Europe we have nationalism and racism in a politicised manner, and those parties would have exploited grievances if not for our welfare state,” he said. “It’s a matter of national security, of our democracy.”

France will have to follow Sweden and Germany in raising the pension age, he argues. “This will have to be harmonised, Europeanised, or it won’t work - - you can’t have a pension at 67 here and 55 in Greece,” Fischer said.

The cost of Irish public sector pensions, which are linked to current salaries, rose 56 per cent in the period 2004-2009 to €2.0bn; the majority of Irish private sector workers have no occupational pension and the average annual return on Irish managed pension funds over a 10-year period is 0.5 per cent, compared with average annual inflation of 3.2 per cent.

The four most economically challenged member countries of the Eurozone - - Spain, Greece, Portugal and Ireland - - were also the biggest beneficiaries of European Union cash transfers in recent decades. In 2013, Ireland will become a net contributor to the EU budget forty years after joining the then EEC and after receiving a net cash gain of €42bn in the equivalent of foreign aid since 1973. One Irish multimillionaire farmer was paid cash of €7,735 each week of 2009, from the EU budget.

The gravy train is creaking and after the worst contraction since the Great Depression, conditions in rich countries will not revert to business as usual despite the recovery.

Increased risk aversion; restriction on public spending because of high public debt; an expected contraction of the financial industry in Europe and the US and the continuing rise of the emerging economies, has changed the outlook.

European Central Bank executive board member, Lorenzo Bini Smaghi, said last January that he did not expect the global economy to return to its pre-crisis situation, as this had been unsustainable.

"I have the impression that many people, whether in the business sector, the financial markets, or in academic and political circles, think that the post-crisis world will be quite similar to the pre-crisis one in 2006-2007. In other words, they expect the economic recovery to bring us back to where we were before the crisis," he said. "My feeling is that those who think like that are deluding themselves."

Bini Smaghi said the pre-crisis situation was not in equilibrium. It was not sustainable. The crisis occurred precisely because the situation was unsustainable, both within certain countries and globally.

In a speech in Washington DC last March, Greek Prime Minister George Papandreou, spoke of the importance of transparency and plans to become the first European country to put detailed information on public spending, online.

Eamonn Gilmore, leader of Irish Labour Party.

In Ireland last month, Labour Party leader, Eamon Gilmore, outlined plans for new job incentive schemes and he spoke in general terms about reform and change. He proposed the fourth official review of the Constitution since 1995.

For an aspiring Taoiseach, against the backdrop of monumental governance failures leading up to the economic crash and a system of limited accountability dominated by vested interests, it was a depressing performance. 

In the aftermath of a severe recession, change is the mantra of every opposition political party in democratic countries and in Ireland; it will be a potent argument in the next general election. However, while Irish political parties do not generally produce detailed policy documents and in the past, headline aspirations and tax inducements have sufficed, a party that is serious about reform needs to have detailed work done on the issue before an election.

Politicians are usually amateurs in areas in which they are given responsibility for and in the Irish system, commissioning a report or several from management consultants and the appointment of so-called task forces are part of the glacial process of policy making.

While arriving in office on a prospectus of pious aspirations is a recipe for failure, it is also foolish not to anticipate the inevitable pressures from a rainbow of vested interests for revived public spending when the recovery takes hold, even though it may be weak.

The culture of having one's cake and eating it will not easily change. For example, the opponents of the Corrib gas project in Mayo are consumers of oil and gas products directly in cars or indirectly via the electricity system. There can be no absolute guarantee of safety and some German and Dutch workers who fund the Common Agricultural Policy that supports the incomes of Rossport farmers, live in cities where there is seldom much choice for the lower-paid as to the proximity to danger such as at port oil terminals and so on. 

It’s time for the politics of courage and as with Fine Gael in opposing Eurozone governance reform, if inconvenient truths are avoided before the general election, then the parties will reap the whirlwind in office.

On the key issue of sustainable job creation, the current regime shows no evidence of informed strategic thinking for positioning Ireland in the coming two decades when Asian economic output will exceed the combined total of the US and EU. It just rubber stamps a flawed innovation task force report. A State investment bank created by a new government would in itself have only a marginal impact. Every country wants to export its way out of recession but as with domestic issues, spoof and spin must be set aside to realistically appreciate the international challenges.

Finally, Eamonn Gilmore's steering clear of the specifics of public service reform prevents him from addressing other areas such as the cartel-like fees in professional services. The Government is their biggest customer and protects them from transparency and serious competition. State toxic property loans agency, NAMA, has become the latest rainmaker, pencilling in €2.5bn in fees in its budget and the Victorian system of secrecy has been seamlessly stewed into the structure. So in a period of austerity, why are some of Dublin's law firms among the biggest earners in Europe? The same question can be asked about the super-fees in medicine, paid via the insurance system and much more.

Maybe Eamon Gilmore should have a chat with fellow socialist George Papandreou!

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© Copyright 2011 by Finfacts.com

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